Why is the DAX Index Attempting to bounce back today?
The DAX index erased earlier losses as investors remained optimistic about a new stimulus package being pushed by Angela Merkel. The index is up by more than 0.57% and is trading at €12,030.
German stocks rise as Merkel plans more stimulus
German stocks are ecstatic about a new stimulus package worth more than €130 billion. According to Bloomberg, Merkel will sign off key initiatives to jumpstart the economy that has been battered by the virus.
The stimulus package will involve several elements. First, she will lower the value added tax from 19% to 16%. This is designed to lower the cost of customers and incentivize them to shop more. Second, it will have a bridge financing mechanism for small companies. This plan will be worth as much as €25 billion.
Third, the government will accelerate €10 billion investments in digital, security, and defence projects. This will help several companies in the DAX index like engine-maker MTU Aero and SAP. Fourth, the government will provide €300 euros to all children and €5.3 billion to municipalities.
The government will pay for this project by increasing external borrowing by at least €30 billion.
Deutsche Bank gains amid bad loans surge
Deutsche Bank was among the best performing stocks in the DAX index today. This is even after the company said that provisions for bad loans will rise to the highest level in a decade. The company expects these provisions to hit €800 million. The bank had set aside €506 million in the first quarter.
The rally on Deutsche bank shares is mostly because of the rising volatility in the market. Investors believe that the volatility will drive upwards the firms Fixed Income, Commodities, and Currencies (FICC) income as it did in the first quarter.
DAX index top movers
MTU Aero was the best-performing stock in the DAX index, rising by more than 4% as the government announced the stimulus. It was followed by Daimler, Deutsche Bank, Volkswagen and BMW, whose shares rose by more than 1%.
On the other hand, the worst-performers in the DAX were Fresenius, Muench, Merck, Deutsche Telekom, and SAP.
The DAX index opened at €11,767 but it later pared some of the losses and is now trading at €12,060. On the daily chart, the price is above the 50-day and 100-day exponential moving averages and is between the 78.6% and 61.8% retracement level. The today’s increase comes after the index formed a three black crows pattern. Therefore, there is a possibility that the index will resume falling as bears attempt to test the 61.8% retracement at €11,578.
On the flip side, a move above the 78.6% retracement level at €12,560 will invalidate this trend.